Outlook yummier at fast-food chains

LOUISVILLE, Ky. - When the parent company of KFC, Taco Bell and Pizza Hut cut its ties to PepsiCo Inc., the prospects might have caused indigestion for even the most upbeat executive.

The new company had $4.7 billion in debt and a far-flung business with little cohesion and lackluster sales.

"There was huge anxiety in our company," said David C. Novak, the chairman and chief executive officer at Louisville-based Yum Brands Inc.

Ten years later, Yum has cut its debt in half, added two more brands, opened thousands more restaurants worldwide and become the dominant U.S. fast-food player in China.

Not everything has gone smoothly. U.S. sales are sluggish, and the company has suffered public relations black eyes - from an E. coli outbreak at some East Coast restaurants to a rat infestation in a franchise KFC/Taco Bell store in New York City. Recently, it reported its third-quarter profit rose 17 percent thanks to fast growth in its international and China divisions that offset sluggishness in U.S. sales.

Overall, Yum has gained a reputation since the spinoff as an innovative, aggressive company that bounces back from problems to perform well consistently, said Bear Stearns restaurant industry analyst Joe Buckley.

"I think management has done a terrific job taking kind of a messy, loosely confederated company at the origin and making it a much more cohesive, well-functioning company," he said.

The three restaurant chains were largely autonomous and sometimes competitors at the outset, said Mr. Novak, who was second in command of what was then called Tricon Global Restaurants. For instance, the chains might eye the same piece of property for development, bidding against one another, he said.

Against that backdrop, Mr. Novak viewed the spinoff as a chance for "a giant do-over."

Yum property planners decide which chain best fits a parcel of land, based on local population, traffic and competition. A food- purchasing cooperative leverages the company's size in seeking the best prices for ingredients used by all its brands. All restaurants benefit, franchisee-owned and company-owned alike.

Yum's stock price has quadrupled in value since the spinoff, with a couple of stock splits during that time. In 2002, it acquired two more brands - Long John Silver's and A&W All-American Food Restaurants - and changed the Tricon name to Yum Brands.

Entering its second decade, more challenges await the 35,000-restaurant company that sees itself going toe-to-toe with McDonald's Corp. for global fast-food supremacy.